What Is the Residue of Your Estate – and Who Should Receive It?

When people think about making a Will, they often start with individual gifts.  Perhaps a particular piece of jewellery is to go to a daughter, a sum of money to a grandchild, or a donation to a charity.  Those gifts can be important, but in many Wills the most significant provision is the clause dealing with the residue of the estate.  The residue is broadly what is left after the estate has met its liabilities and dealt with any gifts that come before it.  For many people, that means the residuary clause determines who ultimately receives most of their wealth.

What forms part of the residue?

Your estate may include assets such as:

• money in bank accounts;
• investments;
• shares;
• vehicles;
• personal possessions;
• land or a home owned in your personal name; and
• money or property received by the estate after your death.

Before the residue can be distributed, the executor will generally need to deal with matters such as funeral and estate administration expenses, debts, tax liabilities and any specific or monetary gifts made under the Will.

What remains is the residue.

For example, a Will might leave:

$10,000 to each grandchild, with the rest of the estate divided equally between the Will-maker's children.

The gifts to the grandchildren are dealt with first. What remains after those gifts and the estate's liabilities have been met is divided between the children under the residuary clause.

Why the residuary clause matters

A Will can contain carefully considered individual gifts but still produce an unsatisfactory result if the residue has not been properly addressed.

This is particularly important because the size of an estate can change considerably over time.

A person who makes a Will at 55 may own very different assets when they die at 85. A house may have been sold, investments may have changed and money may have been spent on retirement or residential care.

A well-drafted residuary provision does not depend on the estate looking exactly as it did when the Will was signed.

Instead, it provides a structure for dealing with whatever remains at the time of death.

Should you use percentages or fixed amounts?

This is one of the practical questions to consider.

A fixed gift may work well where the Will-maker wants a person to receive a particular amount. The difficulty is that the value of the estate may later change.

For example, leaving:

• $100,000 to one child; and
• the residue to another

can produce very different proportions depending on the eventual value of the estate.

If the estate is worth $1 million, the difference may be relatively modest. If the estate is worth $250,000, the outcome is quite different.

Where the intention is for beneficiaries to share an estate in particular proportions, using percentages or shares of the residue will often better reflect that intention.

What happens if a residuary beneficiary dies before you?

Your Will should say.

It is not enough simply to name the people you want to benefit. You should also consider what is to happen if one of them dies before you.

For example, if the residue is left equally to three adult children, should the share of a child who dies first:

• pass to that child's own children;
• be divided between the surviving siblings;
• pass into a trust;
• go to another named beneficiary?

These questions can make a considerable difference, particularly in families with grandchildren or blended-family arrangements.

Clear substitute-beneficiary provisions reduce the risk of uncertainty later.

Blended families require particular care

The residuary clause is often especially important where a Will-maker has a spouse or partner as well as children from an earlier relationship.

Simply leaving the entire residue to the surviving partner may not provide any certainty that the deceased's children will ultimately receive part of the estate.

On the other hand, leaving everything immediately to children may leave the surviving partner without sufficient financial security.

One option can be a life interest or testamentary trust, under which assets are held for the benefit of the surviving partner during their lifetime, with the remaining property ultimately passing to children or other beneficiaries.

The appropriate structure depends on the family, the assets involved and what the Will-maker is trying to achieve.

Leaving the residue to a family trust

Some people want their estate, or part of it, to pass to an existing family trust.

That can be appropriate, but it should not simply be assumed that because a trust exists it is necessarily the best residuary beneficiary.

The trust deed should be reviewed, including:

• who the trustees are;
• who has the power to appoint and remove trustees;
• who the beneficiaries are;
• whether the trust is expected to continue;
• whether there are loans or other arrangements between the Will-maker and the trust; and
• whether there are tax or cross-border issues to consider.

The Will and the trust should work together.

It is also important to distinguish between assets owned personally and assets already owned by the trust. A Will can generally deal only with assets that form part of the deceased person's estate.

What about charities?

A person can leave all or part of the residue to one or more charities.

Where a charitable gift is intended, the organisation should be identified carefully. Charities can merge, change names or restructure over time, so the drafting should allow the executor to identify the intended recipient and deal sensibly with a change in circumstances.

A charitable gift can also be expressed as a percentage of the residue, rather than a fixed amount.

Personal possessions can cause problems too

People sometimes assume that anything not specifically mentioned will simply be dealt with informally by the family.

That is not always a comfortable position for an executor.

A Will can provide for personal possessions separately, for example by giving them to a spouse, dividing them between children, or allowing the executor to distribute them having regard to a memorandum or letter of wishes.

Anything not dealt with separately will generally fall into the residue.

That may include items the Will-maker never thought to mention individually.

A residuary clause should deal with failure

A good residuary clause also considers what happens if the first intended beneficiaries cannot inherit.

For example, if the residue is left to two children and both die before the Will-maker, what happens next?

The Will might provide for:

• grandchildren;
• wider family members;
• a family trust;
• charities; or
• another nominated person.

Without an effective alternative provision, part of the estate may fall into intestacy and be distributed under the statutory intestacy rules rather than according to the Will-maker's preferred plan.

The residue often carries the real estate plan

Specific gifts tend to attract attention because they are easy to visualise: a ring, a painting, $20,000 or a particular property.

But the residuary clause is often the part of the Will doing most of the work.

It determines who receives whatever remains, how those beneficiaries share, what happens if one of them dies first, and whether the estate is distributed outright or held on trust.

For that reason, one of the questions I spend time discussing with clients is not simply:

“Who would you like to leave something to?”

It is:  “Who do you ultimately want to benefit from what is left of your estate, and what should happen if circumstances change?”

That usually leads to a much more useful discussion about how the Will should operate.

Planning or updating your Will?

Your Will should work with your family circumstances, your assets and any trusts or other structures you already have in place.

We can help you work through the practical decisions and prepare a Will that clearly records what you want to happen.

Plan. Protect. Pass on.

This article provides general information only and is not a substitute for legal advice about your particular circumstances.